ORANGE COUNTY IN BANKRUPTCY : $634 Million in Notes Sold to Fannie Mae : Investments: Sale price of $577 million appears to delight county officials. Reduction in investment pool shrinks county’s potential losses.

In the biggest sale so far of its troubled “derivative” securities, Orange County on Thursday sold $634 million in so-called structured notes back to their original issuer, the Federal National Mortgage Assn.

The government-sponsored agency, known as Fannie Mae, paid $577 million to repurchase and retire the package of seven securities, the county said. That price--about 91 cents on the dollar--appeared to delight county officials, who said it was more than the complex, hard-to-sell securities would have fetched on the open market.

“We’re real pleased with this,” said Thomas W. Hayes, the county’s financial adviser. Fannie Mae said through a spokesman that it had paid a “fair and economic” price.

To stanch the losses in the portfolio it manages for itself and 186 other municipalities and government agencies, Orange County is liquidating its holdings, which were valued at $7.8 billion shortly after the county sought bankruptcy protection early this month.

Of the proceeds from the Fannie Mae transaction, $92.2 million will go to pay off investment loans; the balance of $484.8 million will go to the county, which will reinvest it in short-term U.S. Treasury securities.

In a separate transaction, Bank of America on Thursday sold $307 million in government agency securities owned by the county but held on behalf of the investment pool’s lenders. B of A received $286.7 million for the package; all of that will go to pay investment loans.

The county’s sale of the Fannie Mae derivatives significantly reduces the exposure of its remaining $4.53-billion portfolio to adverse changes in interest rates, Hayes said. After the sale, every percentage point rise in rates will reduce the portfolio’s value $145 million. That figure was $220 million a week ago and $300 million on Dec. 13, when the portfolio liquidation started.

The sale also reduces the percentage of derivatives in the portfolio to a little more than 75%, down from nearly 80%.

Hayes said the latest sale kept the county on track to hold its loss on the portfolio to $2.02 billion, or 27% of the investors’ principal. But he cautioned that the holdings are still far too exposed to interest rate-related losses.

“If interest rates move higher, the county could still lose money,” Hayes said.

The county’s Fannie Mae notes included some of its more elaborately structured “inverse floaters”--securities designed to pay higher yields as market interest rates fall.

However, rates this year have risen sharply, and the dividend payouts on the securities plummeted. For one Fannie Mae note on which the county held $100 million as recently as Nov. 23, the interest paid plunged from 7% in February to 3.93% in November. The payout on another Fannie Mae note in the portfolio was based on an arcane measurement of rates in the German currency market.

Hayes and officials at Salomon Bros., the county’s financial advisory firm, originally believed that their best chance of unloading such exotica might lie in returning the notes to their issuers in a swap for more conventional, less volatile notes.

But Fannie Mae agreed to take the notes for cash, possibly because the agency is increasingly sensitive to the need to assist buyers of its more volatile securities.

“This is the best possible solution for all parties,” Hayes said. “We got cash proceeds rather than another security to market.”

Remaining to be sold are $1.12 billion in conventional securities and $3.41 billion in derivatives. The county owes $1.24 billion to lenders and other holders of collateral, according to the latest portfolio status report provided by Salomon Bros.